03 - Approaches to budgeting.

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Purposes of budget planning
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Planning. | Authorisation. | Delegation. | Evaluation. | Motivation. | Communication. | Co-ordination. | Control.
PADEM CCC
Top-down budget is...
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A budget that is IMPOSED on the budget holder by senior management.
Advantages of top-down budget:
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Slack avoiding. | High-level management retain control. | Inexperience managers bad decisions avoiding. | Dysfunctional behaviour avoiding. | Occasionally quicker.
SHIDO tłum
Bottom-up budget involves...
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divisional managers participating in the setting of the budgets.
Advantages of bottom-up budgets:
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Time of senior management released. | Local knowledge using. | Understanding of divisional managers increased. | Motivation improved.
TŁUM shido
Fixed budget definition:
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When a budget is prepared for single level of activity.
Flexible budget definition:
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Prepared with the cost behaviour of all elements known and classified as either fixed of variable. The budget may be flexed to the actual level of activity.
Rolling budget definition:
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Kept continually up to date by adding another period when the earliest period has expired.
Incremental budget definition:
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Starts with previous period's budget or actual results and adds or subtracts an INCREMENTAL AMOUNT.
Activity-based budgeting characteristics (ABB):
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Uses the principles of ABC | to estimate the firm's future demand for RESOURCES so can help the firm to acquire these resources more efficiently.
Steps involved in Activity-Based Budgeting
5 steps
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1. Estimate the production and sales volumes. 2. Estimate the demand for activities. 3. Determine the types of resources required.
SV - DA - DR - RQ - TA
4. Estimate the quantity of each resource. 5. Take action to adjust the capacity of resources to match projected supply.
Advantages of ABC:
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Recognises that complexity and diversity result in overheads not all driven by activity level. | More accurate cost per unit. | Understanding of what drives costs resulting in better: - pricing - cost control - decision making.
C C PCD
Disadvantages of ABC:
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Time and cost. | Advantages limited if OVERHEADS minimal or mainly driven by level of production. | Customers may not tolerate 3 changes*. | Advantages limited if activity costs already well controlled.
TACA
* price increases, | changes to product range or specification.
Activity-based management (ABM) is:
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Method of evaluating ACTIVITIES | that a business performs using ABC to carry out | a value chain analysis or BPR | to improve strategic and operational decisions in an organisation.
ABM
Zero-based Budgeting definition:
ZBB
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A budgeting that requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero.
Steps in ZBB:
4 steps
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1. Managers specify for their responsibility centres those activities that can be individually evaluated. 2. Describe each of the individual activities in a decision package*. 3. Evaluate and rank each package**. 4. Allocate resources to various packages.
**usually using cost/benefit analysis.
*which should state the costs and benefits expected AND be drawn up in such way that it can be evaluated and ranked.
Advantaged of ZBB:
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Obsolete or inefficient operations can be identified and ended. | Business environment changes responding. | Resources allocated economically. | Understanding a cost-behaviour | Staff involvement at all levels increased.
majster OBRUS
Disadvantages of ZBB:
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Management skills needed. | Activities difficult to compare. | Judgemental nature of packages rankings. | Short-termism. | Time and cost. | Enormous demotivation due to time spent. | Rigidity of budgeting process danger.
MAJSTER obrus
Rolling budgets advantages:
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Serious treatment of budgeting process improved. | Information of PM is better. | Accurateness is improved. | Relevance much better by the end of the traditional budgeting period.
RB - SIAR dla-t
Rolling budgets disadvantages.
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Demotivating as the targets are changing regularly. | Last budget 'Plus or minus a bit' danger. | Actual results weaker controlled.* | Time-consuming.
RB - siar DLA-T.
*Due to increase in budgeting work time expense.
Variances types:
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Planning | and Operational.
Planning variance definition:
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The difference between the original an the revised budget (uncontrollable by line manager).
Operational variance definition:
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The difference between the revised standard and the actual performance (controllable by line manager).
Operational ABM is about:
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“doing things right”
using ABC information to improve efficiency. Those activities which add value to the product can be identified and improved. Activities that don’t add value are the ones that need to be reduced to cut costs without reducing product value.
Strategic ABM is about:
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“doing the right things”
using ABC information to decide which products to develop and which activities to use. This can also be used for customer profitability analysis, identifying which customers are the most profitable and focusing on them more.

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